In particular, it was two numbers that served to send the stock crashing 11% in after-hours trading on Wednesday. The first was same-store sales, which increased just 1.3% in the company's third fiscal quarter on a constant currency basis. Wall Street was looking for an increase of 2.8%. Adding insult to injury, same-store sales slowed further toward the end of the third quarter. Whole Foods co-CEO Walter Robb conceded on an earnings call with analysts that investments in lower prices were taking "longer than we would have hoped" in providing a boost to sales.
The second concerning number for investors were the quarter's gross profit margins of 35.6%, down 66 basis points from the previous year. In a statement, Whole Foods acknowledged greater competition was having an impact on its margins.
"Results reflect the company's more aggressive efforts to improve its price relevancy, as well as higher shrinkage in the last two weeks of the quarter given purchases were planned for a higher level of sales heading into the 4th of July holiday," said Whole Foods. Inventory shrinkage is a retail term meant to describe theft by consumers or product spoilage.
Overall, Whole Foods' earnings came in at 44 cents a share, falling shy of analyst estimates for 45 cents a share.
For the first three weeks of the fourth fiscal quarter ended July 26, Whole Foods sales have gained just 0.6%. In addition to mounting competitive threats, Whole Foods' weak sales so far in July were likely due to an admission by the company that it was overcharging consumers in New York City. "The impact was felt across the country," said a Whole Foods exec on the call. Comments on the matter from Whole Foods founder John Mackey came under fire on social media Wednesday evening.
"It's just something that went viral in the media, and it has hurt our trust with consumers and yet, we do feel like we're victims," said Mackey on the overcharging situation. He added, "we don't know exactly why the Department of Consumer Affairs (DCA) went after Whole Foods like this, and we're not sure why the media went crazy with it, but it did happen."
The quarter's disappointing sales trends sparked fears that Whole Foods continues to cede market share in the organics business to Wal-Mart (WMT) - Get Report, Target (TGT) - Get Report and others in spite of efforts to lower prices in areas like produce. And, Mackey's execs comments signal the organic grocer could have a major hill to climb to regain consumer's trust.
Whole Foods has been doing its best to temper Wall Street's sales and earnings expectations, but so far it has fallen on deaf ears. "For the last couple of years, we have been hunted -- this turns us back into the hunter," explained Whole Foods co-CEO Walter Robb at a June 11 analyst conference on the company's new concept 365 by Whole Foods.
The new store concept, which promises to offer a more convenient shopping experience and lower prices than a Whole Foods stores in order to reignite growth, is scheduled to debut in 2016. The company disclosed it signed four leases for 365 by Whole Foods, with the first location poised to be in the Silver Lake area of Los Angeles.
On Wednesday's call, Robb, a 24-year veteran of Whole Foods, pointed out the intensifying competition in the organics business. "But look what has happened, the acceleration of the number of competitors, the competitors in aggregate, and the intensity of the competitive evolution that's happening right now is I think what has changed," said Robb.